19 Jul 2010

Arbitrator cannot go beyond agreement: Supreme Court

Holding that arbitrator being itself a constituent of an agreement to such effect, it was not within the prerogative to go beyond the categorical stipulations of the agreement, the Supreme Court in a recent declaration revisited the law on the issue to hold that the position was well settled in terms of its previous decisions. The Court made a reference to its earlier decisions to hold that the arbitrator derived its authority from the agreement and his terms of reference being determined by the agreement, he could not pass an award against or beyond the contractual stipulations. 

The Supreme Court declared the law to this effect in the following terms;

16. That brings us to the question whether an Arbitrator can make an award contrary to the terms of the contract executed between the parties. That question is no longer res integra having been settled by a long line of decisions of this Court. While it is true that the Courts show deference to the findings of fact recorded by the Arbitrators and even opinions, if any, expressed on questions of law referred to them for determination, yet it is equally true that the Arbitrators have no jurisdiction to make an award against the specific terms of the contract executed between the parties. Reference may be made, in this regard, to the decision of this Court in Steel Authority of India Ltd. v. J.C. Budharaja, Government and Mining Contractor, (1999) 8 SCC 122 where this Court observed :
“ …….. that it is settled law that the arbitrator derives authority from the contract and if he acts in manifest disregard of the contract, the award given by him would be an arbitrary one; that this deliberate departure from the contract amounts not only to manifest disregard of the authority or misconduct on his part, but it may tantamount to mala fide action…...” 
…… It is true that interpretation of a particular condition in the agreement would be within the jurisdiction of the arbitrator. However, in cases where there is no question of interpretation of any term of the contract, but of solely reading the same as it is and still the arbitrator ignores it and awards the amount despite the prohibition in the agreement, the award would be arbitrary, capricious and without jurisdiction. Whether the arbitrator has acted beyond the terms of the contract or has travelled beyond his jurisdiction would depend upon facts, which however would be jurisdictional facts, and are required to be gone into by the court. The arbitrator may have jurisdiction to entertain claim and yet he may not have jurisdiction to pass award for particular items in view of the prohibition contained in the contract and, in such cases, it would be a jurisdictional error….” 
17. It was further observed: 
“…..Further, the Arbitration Act does not give any power to the arbitrator to act arbitrarily or capriciously. His existence depends upon the agreement and his function is to act within the limits of the said agreement…..”
18. In W.B. State Warehousing Corporation & Anr. v. Sushil Kumar Kayan & Ors. (2002) 5 SCC 679, again this Court observed:
“……. If there is a specific term in the contract or the law which does not permit the parties to raise a point before the arbitrator and if there is a specific bar in the contract to the raising of the point, then the award passed by the arbitrator in respect thereof would be in excess of his jurisdiction….”
19. In Bharat Coking Coal Ltd. v. Annapurna Construction (2003) 8 SCC 154, this Court reiterated the legal position in the following words:
“There lies a clear distinction between an error within the jurisdiction and error in excess of jurisdiction. Thus, the role of the arbitrator is to arbitrate within the terms of the contract. He has no power apart from what the parties have given him under the contract. If he has travelled beyond the contract, he would be acting without jurisdiction, whereas if he has remained inside the parameters of the contract, his award cannot be questioned on the ground that it contains an error apparent on the face of the record.”
20. In MD, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd. (2004) 9 SCC 619 also this Court took the similar view and observed:
“An Arbitral Tribunal is not a court of law. Its orders are not judicial orders. Its functions are not judicial functions. It cannot exercise its power ex debito justitiae. The jurisdiction of the arbitrator being confined to the four corners of the agreement, he can only pass such an order which may be the subject-matter of reference.
21 Reference may also be made to the decisions of this Court in Associated Engineering Co. v. Government of Andhra Pradesh & Anr. (AIR 1992 SC 232), Jivarajbhai Ujamshi Sheth & Ors. v. Chintamanrao Balaji & Ors. (AIR 1965 SC 214), State of Rajasthan v. Nav Bharat Construction Co. (AIR 2005 SC 4430), Food Corporation of India v. Surendra, Devendra & Mahendra Transport Co. (2003) 4 SCC 80, which sufficiently settle the law on the subject.

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